Data Shows That BTC Futures Open Interest Hit $1B Days Before Price Drop
Once upon a time, the BitMEX derivatives exchange was the king over other crypto derivatives exchanges. Back in July of 2019, the company boasts half of the entire market share. Back then, every crypto trader in the big leagues held a close eye on every BitMEX-connected indicator, be it open interest, funding rate, and basis.
Open Interest Lead To Price Crash, Evidence Shows
Today marks a very different environment, but the fundamentals stay the same. Open interest, in particular, measures the total amount of contracts that are being held by the market’s participants. A higher open interest represents a greater size in the potential liquidations.
A prime example could be seen as a $1,400 crash in BTC price that occurred on the 2nd of August, when Bitcoin futures reached past $1 billion in open interest, causing forceful closure thanks to insufficient margins.
While there is no hard and fast rule when it comes to this, the general consensus is that traders start to get nervous the moment open interest starts to go to the $1 billion mark. After that, a phenomenon happens that’s been dubbed the BitMEX Ghost. In 2019’s second half, this event became clear. Massive Bitcoin price crashes happened across seven different instances, all connected with the open interest reaching $1 billion just before it happened.
Clear Correlation Between Open Interest And BTC Price
An asset’s risk associated with high levels of open interest depends primarily on the underlying asset’s liquidity. The third quarter of 2019 saw Bitcoin’s daily spot volumes reach an average of $2.4 million. As such, any single contract worth 42% of the total Bitcoin in circulation seems like a big thing indeed.
TradingView provided a neat little demonstration about the matter, making the correlation between the open interest rising close to $1 billion and a subsequent price crash all the clearer. Something of particular note is the number of contracts in play neither being bullish or bearish; the only thing making people nervous is if it goes close to that $1 billion mark.
BitMEX Gets Dethroned
The second half of 2019 was a very rough one for crypto at large, with public bashings of Bitcoin coming from even the US President at the time, Donald Trump. Steven Mnuchin, the US Secretary for the Treasury, mandated additional oversight and regulation within the space, as well.
While Bitcoin was once king, it had been dethroned by OKEx, with other contenders only growing in shares. Everything from Binance to the Chicago Mercantile Exchange to Bybit managed to etch out a piece of the crypto derivatives market.